Industry Applauds Star-Crossed Tax Bill

Although Congress included much of what the mutual fund industry sought in a major tax cut bill - the Financial Freedom Act of 1999 - that legislation is likely to be vetoed by President Clinton next month.

Clinton has said he will veto the $792 billion, ten-year tax cut bill because he would like to use the budget surplus to reduce the national debt and bail out Medicare and the Social Security system. He and other Democrats have also said the bill favors the wealthy.

But, a number of leading mutual fund companies and the Investment Company Institute, the mutual fund trade group in Washington, D.C., maintain that the bill would greatly increase retirement savings in the United States and should be enacted.

The bill, sponsored by Rep. Bill Archer (R-Texas), passed the Senate on August 5 by one vote (50-49) after it squeaked by the House on July 22 by another close call (221-206). The measure would gradually cut personal income taxes by 10 percent in all tax brackets over the next ten years. It would also decrease the top rate on capital gains from 20 percent to 18 percent.

But, ICI focused its energy on obtaining provisions that would stimulate tax-deferred retirement savings plans, not these measures, said ICI spokesperson Chris Wloszcyna.

It sought to increase contribution limits to employer-sponsored savings plans and IRAs, to allow people over the age of 50 to make larger contributions than younger people as a form of catch-up and to permit funds to be transferred between 401(k), 403(b) and 457 plans, Wloszcyna said.

All of the measures ICI sought were included in the bill. The Financial Freedom Act would increase the annual IRA contribution limit from $2,000 to $5,000 by 2006 and would increase employer-sponsored savings plan limits from $10,000 a year to $15,000 by 2005.

The bill would also allow people age 50 or older to increase their contributions to standard IRAs and salary-deferred pension plans by 50 percent by 2005. The bill would further allow individuals to transfer savings between different types of defined contribution plans.

The bill went even further than ICI sought in allowing affluent individuals to contribute to Roth IRAs. Starting in 2003, income limits on eligibility to contribute to Roth IRAs would increase from $95,000 to $100,000 for individuals. For couples, the limit would rise from $150,000 to $200,000. The bill would also allow couples making $200,000 a year to convert a regular IRA to a Roth IRA. Currently, only couples earning $100,000 or less are allowed to do so.

The bill would further allow investors to make after-tax contributions to 401(k) and 403(b) plans, and distributions from these contributions would not be taxed, much like a Roth IRA.

"We believe [the bill] is important," said Jessica Catino, a spokesperson for Fidelity Investments of Boston. "Any way people can increase their retirement holdings, we are in favor of... The IRA contribution limit has remained the same for 17 years."

"This legislation provides incentives for all Americans to prepare for their retirements [and] incorporates self-reliance as an important component of retirement security," said Kathy Hamor, executive director of The Savings Coalition of America of Washington, D.C., whose members include Fidelity, .Merrill Lynch of New York, American Express Financial Advisors of Minneapolis, Minn., Scudder Kemper Investments of Boston, Charles Schwab of San Francisco, American Century Investments of Kansas City, Mo., Prudential Securities of Newark, N.J., and Citigroup of New York.

ICI has not calculated what impact the bill would have on the mutual fund industry, Wloszcyna said. However, the changes would certainly attract a significant amount of assets to the industry, said William DeReuter, vice president for government relations for Merrill Lynch.